Will Bridgepoint Be Held Back a Year?

Robert Weinstein |Contributor

Tuesday, 10 Jul 2012 | 12:41 PM ETThe Street

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Dunce

If you’re a Bridgepoint Education investor, Monday’s press release must have left you feeling like you bombed your final exam before graduation. If you haven’t already panicked out of your position, you could feel better when Bridgepoint bounces back, likely later in the week.

Online schools Apollo Group, Corinthian Colleges, DeVry, and Education Management have sat in detention for the past three years.

Once considered a safe investment sector during recession , the education space has been forced to wear a dunce cap repeatedly. Bridgepoint isn’t the first school to fall on accreditation fear or failings. The whole industry took a turn for the worse when scandals over recruiting practices destroyed half the market capitalization of the industry.

Bridgepoint has lost about 33 percent of its market cap since Friday’s close as a result of Western Association of Schools and Colleges’ move to deny accreditation to Bridgepoint’s Ashford University. Fortunately for Ashford and Bridgepoint’s investors, Ashford is already accredited by the Higher Learning Commission.

While Bridgepoint clearly has its homework cut out for it at the Ashford location for the next few years, the next exam is not until 2014 or 2015. That’s plenty of time for Bridgepoint to make the changes needed to satisfy academia’s requirements, which include improving student retention and full-time faculty.

Unfortunately, what captured Wall Street’s attention Monday is fear of what may or may not happen in two or more years. That’s a lifetime in the corporate world, and a fear that appears to be overblown based on other statements by the Western Association of Schools and Colleges.

Western Association of Schools and Colleges acknowledged efforts by Bridgepoint to address the issues and said more time is needed to assess their effectiveness.

Bridgepoint already was trading below the widely followed 200-day moving average, adding fuel to liquidation based on chart technicals.

The chart to watch for Bridgepoint is the weekly chart, where you can find this week’s drop moving through the 90-week moving average and support at $18. Both these levels offer support and resistance. More importantly, both offer a history of reactions with price retracements that suggest Bridgepoint will once again trade above $18 soon.

Revenue and earnings are bright spots for Bridgepoint. Bridgepoint is on the honor roll with revenue quickly nearing $1 billion dollars annually, an improvement of 9.2 percent over last year. Based on revenue and an apocalyptic future price-to-earnings ratio of 5, it appears the selloff is beyond reasonable and likely short-lived. The industry-wide earnings ratio is estimated at near 20, with Apollo, DeVry, and Corinthian near 10.

Corinthian missed by a penny on May 3 when it reported quarterly earnings of 15 cents a share. Apollo reported $1.20 in earnings on June 25, beating estimates by 23 cents. Bridgepoint’s next earnings release is scheduled for Aug. 7. Two days later, DeVry reports, and we should have a very good idea of what to expect. As a result, expect increased volatility for DeVry through earnings.

Insiders hold an abundance of shares and didn’t sell enough in the previous six months to develop a clear bias. I like to see management and investors interests aligned. With Bridgepoint, I can say that’s the case.

Buy News-Driven Sell-Offs

Based on my experience with gap-downs following news-driven events similar to those at Bridgepoint, investors will see short-term lows Tuesday or Wednesday. Monday’s low testing $14 with a strong bounce higher suggests it won’t take much time for the market to figure out its first knee-jerk reaction may be overdone.

Want to see a classic news-driven crash based on a possible problem result after the fact? Take a look at Visa, which fell further and further on Dec. 16, 2010.

I recall that trading day, and my opinion about Visa was the same as my current opinion of Bridgeport: Shares are oversold and will recover. Visa dropped as a result of federal caps on debit card fees. The selloff proved to be a very good entry for a short-lived bargain.

Visa traded at a low the day after the large price drop and hasn’t traded as low since. A year and a half later, Visa trades at about double the price. This is a classic pattern I see often, and you can, too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. Ask if the reason for the drop is a material impact or something the company can do something about.

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, Robert Weinstein did not hold a position in any stock mentioned.